Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion contains forward-looking statements that involve risks and uncertainties. The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in Part II, Item 1A. “Risk Factors” and other sections of this Quarterly Report and our consolidated financial statements and notes thereto included in our Annual Report. The financial data discussed below reflects the historical results of operations and financial position of the Company. References in this Quarterly Report to “Zevia,” the “Company,” “we,” “us,” and “our” refer (1) prior to the consummation of the Reorganization Transactions, to Zevia LLC, and (2) after the consummation of the Reorganization Transactions, to Zevia PBC and its consolidated subsidiaries unless the context indicates otherwise. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Overview
We are a high-growth beverage company that is disrupting the liquid refreshment beverage industry with great tasting, zero sugar beverages made with simple, plant-based ingredients. We are a Delaware public benefit corporation designated as a “Certified B Corporation,” and are focused on addressing the global health challenges resulting from excess sugar consumption by offering a broad portfolio of zero sugar, zero calorie, naturally sweetened beverages. All Zevia® beverages are Non-GMO Project verified, gluten-free, Kosher, vegan and zero sodium and include a variety of flavors across Soda, Energy Drinks, Organic Tea, Mixers, Kidz drinks and Sparkling Water. Our products are distributed across the U.S. and Canada through a diverse network of major retailers in the food, drug, warehouse club, mass, natural and e-commerce channels. We believe that consumers increasingly select beverage products based on taste, ingredients and fit with today’s consumer preferences, which has benefited the Zevia® brand and resulted in over one billion cans of Zevia sold to date.
Consumers can purchase our products in both brick-and-mortar and e-commerce channels. Zevia was initially distributed in the U.S. natural products retail channel, where we still maintain the leading position. Fueled by a loyal and growing consumer base, we expanded our presence online and into conventional food, drug, warehouse club and mass retailers. In the second quarter of 2022, Zevia was the highest selling carbonated soft drink brand on Amazon according to Stackline, which we believe is representative of an online product discovery and education-oriented purchasing process that is gaining traction among shoppers.
Key Events During the Second Quarter of 2022
On June 16, 2022, the Company announced that Padraic “Paddy” Spence, Chair of the Board of Directors (the “Board”) and Chief Executive Officer (“CEO”) of the Company, would step down as CEO effective August 1, 2022. Following such date, Mr. Spence will continue to serve on the Board as Non-Executive Chair.
In connection with Mr. Spence’s decision to step down from the position of CEO, and consistent with the succession plan developed and approved by the Board, the Board appointed Amy Taylor, the Company’s current President and a member of the Board, to serve as CEO, effective August 1, 2022. Following such date, Ms. Taylor will continue to serve as President and as a member of the Board.
IPO and Reorganization Transactions
On July 26, 2021, we completed our IPO of Class A common stock, in which we sold 10,700,000 shares to the underwriters. Shares of Class A common stock began trading on the New York Stock Exchange under the ticker symbol “ZVIA” on July 22, 2021. These shares were sold at an IPO price of $14.00 per share for net proceeds of approximately $139.7 million, after deducting underwriting discounts and commissions of $10.1 million.
Immediately following the closing of the IPO on July 26, 2021, Zevia LLC became the predecessor of Zevia PBC for financial reporting purposes. Zevia PBC is a holding company, and its sole material asset is its controlling equity interest in Zevia LLC. As the sole managing member of Zevia LLC, Zevia PBC operates and controls all of the business and affairs of Zevia LLC. This reorganization is accounted for as a reorganization of entities under common control. As a result, the condensed consolidated financial statements of the Company will recognize the assets and liabilities received in the reorganization at their historical carrying amounts, as reflected in the historical financial statements of Zevia LLC. Zevia PBC has consolidated Zevia LLC in its financial statements and records a noncontrolling interest related to the Class B units held by the Class B stockholders on its condensed consolidated balance sheet and statement of operations. As of June 30, 2022, Zevia PBC holds an economic interest of 63.9% in Zevia LLC and the remaining 36.1% represents the non-controlling interest.
Factors Affecting the Comparability of Our Results of Operations
As a result of a number of factors, our historical results of operations are not comparable from period to period and may not be comparable to our financial results of operations in future periods. Set forth below is a brief discussion of the key factors impacting the comparability of our results of operations.
Impact of the Reorganization Transactions
The Company is a corporation for U.S. federal and state income tax purposes. Our accounting predecessor, Zevia LLC, was and is treated as a flow-through entity for U.S. federal and most applicable state and local income tax purposes. As an entity classified as a partnership for tax purposes, Zevia LLC is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Zevia LLC is passed through to its members, including the Company. Zevia PBC is taxed as a corporation and pays corporate federal, state and local taxes with respect to income allocated from Zevia LLC based on the Company's economic ownership interest in Zevia LLC, which was 63.9% as of June 30, 2022. Accordingly, the historical results of operations and other financial information set forth in this Quarterly Report do not include a provision for U.S. federal income taxes.
17
Following the completion of the Reorganization Transactions, the Company is taxed as a corporation and pays corporate federal, state and local taxes with respect to income allocated from Zevia LLC based on the Company's 63.9% economic interest in Zevia LLC.
Zevia LLC is the predecessor of the Company for financial reporting purposes. As a result, the condensed consolidated financial statements of the Company recognize the assets and liabilities received in the reorganization at their historical carrying amounts, as reflected in the historical condensed consolidated financial statements of Zevia LLC, the accounting predecessor.
In addition, in connection with the Reorganization Transactions and the IPO, we entered into the tax receivable agreement described in Note 16, - Income Taxes and Tax Receivable Agreement in the Notes to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report.
Initial Public Offering
In July 2021, the Company completed its IPO, which significantly impacted our cash, debt, and equity balances. Concurrent with the IPO, the Company also terminated its previous credit facility, which reduced our outstanding debt to zero, and our interest expense was significantly reduced in the second half of 2021 and in 2022 relative to historical results.
Equity-Based Compensation
In March 2021, Zevia LLC modified certain outstanding RSU awards originally granted in August 2020 to provide for vesting as follows: (i) in the event of a change of control, the RSUs shall vest effective as of such change of control, or (ii) in the event of an IPO, the RSUs shall vest in equal monthly installments over a 36-month period following the termination of any lockup period and shall be subject to the participant’s continued employment through such vesting date. In July 2021, Zevia modified all outstanding restricted phantom unit awards to permit settlement into shares, eliminating the existing cash-settlement provision. These modifications resulted in the revaluation of the awards in accordance with US GAAP. No equity-based compensation had been recognized for all of the RSU and phantom awards as the qualifying vesting event (i.e., the IPO) was not probable. From completion of the IPO through June 30, 2022, the Company recognized $93.9 million of compensation expense attributable to these RSUs and restricted phantom unit awards, as well as other outstanding RSUs. The remaining unamortized fair value of the RSU awards will be recognized as equity-based compensation over the remaining service period of the awards, which vest over a 36-month period following the termination of the lockup period. Refer to Note 11 - Equity-based Compensation in the Notes to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report for unamortized equity-based compensation costs related to each type of equity-based incentive award.
Other Factors Affecting Our Performance
COVID-19 UPDATE
The ongoing COVID-19 pandemic, including the emergence of new variants and its resulting impacts on the global economy, including supply chain challenges and labor shortages, have led to broad-based inflation in input costs, logistics, manufacturing and labor costs. During the six months ended June 30, 2022, we have experienced supply chain constraints and a significant inflationary impact compared to the prior year. These impacts have created headwinds for our products that we expect to continue throughout 2022. These inflationary pressures have and could continue to impact our margins and operating results. We, along with our competitors, have increased pricing on a number of products in response to widespread inflation. These pricing increases may result in future reductions in volume.
The following summarizes the components of our results of operations for the three and six months ended June 30, 2022 and 2021, respectively.
Components of Our Results of Operations
Net Sales
We generate net sales from sales of our products, including Soda, Energy Drinks, Organic Tea, Mixers, Kidz beverages and Sparkling Water, to our customers, which include grocery distributors, national retailers, natural products retailers, warehouse club and e-commerce channels, in the U.S. and Canada.
We offer our customers sales incentives that are designed to support the distribution of our products to consumers. These incentives include discounts, trade promotions, price allowances and product placement fees. The amounts for these incentives are deducted from gross sales to arrive at our net sales.
We have experienced substantial growth in net sales in the past three years. The following factors and trends in our business have driven net sales growth over this period and are expected to continue to be key drivers of our net sales growth for the foreseeable future:
•leveraging our platform and mission to grow brand awareness, increase velocity and expand our consumer base;
•continuing to grow our strong relationships across our retailer network and expand distribution amongst new and existing channels, both in-store and online; and
•continuous innovation efforts, enhancement of existing products, and introduction of additional flavors within existing categories, as well as entering into new categories.
We expect both new distribution and increased organic sales from existing outlets to contribute to growth going forward.
We sell our products in the U.S. and Canada, direct to retailers and also through distributors. We do not have short- or long- term sales commitments with our customers.
18
Cost of Goods Sold
Cost of goods sold consists of all costs to acquire and manufacture our products, including the cost of ingredients, packaging, in-bound freight and logistics and third-party production fees. Our cost of goods sold is subject to price fluctuations in the marketplace, particularly in the price of aluminum and other raw materials, as well as in the cost of production, packaging, in-bound freight and logistics. Our cost of goods sold is generally higher for products sold through our e-commerce and warehouse club channels than through our retail store channel due to additional packaging requirements. Our results of operations depend on our ability to arrange for the purchase of raw materials and the production of our products in sufficient quantities at competitive prices. We have long- term contracts with certain suppliers of stevia and aluminum cans. We expect over the long term that, as the scale of our business increases, we will purchase a greater percentage of our aluminum cans directly rather than through third-party manufacturers. We have long-term contracts with certain manufacturers governing pricing and other terms and minimum commitments on our part, but these contracts generally do not guarantee any minimum production volumes on the part of the manufacturers.
We expect our cost of goods sold to increase in absolute dollars as our volume increases.
We elected to classify shipping and handling costs for salable product outside of cost of goods sold, in selling and marketing expenses in our condensed consolidated statements of operations and comprehensive loss. As a result, our gross profit and profit margin may not be comparable to other entities that present shipping and handling costs as a component of cost of goods sold.
Gross Profit
Gross profit consists of our net sales less costs of goods sold. Our gross profit and gross margin are affected by the mix of distribution channels of our net sales in each period, as well as the level of discounts and promotions offered during the period. Gross profit may be favorably impacted by leveraging our asset-light business model and through increased distribution direct to retailers, the increased scale of our business and our continued focus on cost improvements, particularly in our supply chain.
Operating Expenses
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of warehousing and distribution costs and advertising and marketing expenses. Warehousing and distribution costs include storage, transfer and out-bound freight and delivery charges. Advertising and marketing expenses consist of variable costs associated with production and media buying of marketing programs and trade events. Selling and marketing expenses also includes the incremental costs of obtaining contracts, such as sales commissions.
Our selling and marketing expenses are expected to increase in absolute dollars, both as a result of the increased warehousing and distribution costs resulting from increased net sales, which we expect to be partially offset by our continued focus on cost improvements in our supply chain, and as a result of increased focus on marketing.
General and Administrative Expenses
Administrative expenses include all salary and other personnel expenses (other than equity-based compensation expense) for our employees, including employees related to management, marketing, sales, product development, quality control, accounting, information technology ("IT") and other functions. Our general and administrative expenses are expected to grow at a lower percentage of net sales over time.
Equity-Based Compensation Expense
Equity-based compensation expense consists of the recorded expense of equity-based compensation for our employees and for certain consultants and service providers who are non-employees. We record equity-based compensation expense for employee grants using grant date fair value for RSUs or a Black-Scholes valuation model to calculate the fair value of stock options by date granted. Equity-based compensation cost for RSU awards is measured based on the closing fair market value of the Zevia LLC Class B unit or the Zevia PBC Class A common stock, as applicable, on the date of grant. Over time, we expect our equity-based compensation expense to significantly decrease compared to the year ended December 31, 2021 as a result of the expiration of the lockup period in January 2022, which coincided with the end of the vesting period for the majority of the awards.
Depreciation and Amortization
Depreciation is primarily related to building, software applications, computer equipment and leasehold improvements. Intangible assets subject to amortization consist of customer relationships. Non-amortizable intangible assets consist of trademarks, which represents the Company’s exclusive ownership of the Zevia® brand used in connection with the manufacturing, marketing, and distribution of its beverages. We also own several other trademarks in both the U.S. and in foreign countries. Depreciation and amortization expense is expected to increase in-line with ongoing capital expenditures as our business grows.
Other (expense) income, net
Other (expense) income, net consists primarily of interest (expense) income, and foreign currency (loss) gains.
19
Results of Operations
The following table sets forth selected items in our condensed consolidated statements of operations and comprehensive loss for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
(in thousands, except per share amounts) |
|
|
|
|
|
|
Net sales |
|
$ |
45,542 |
|
|
$ |
34,352 |
|
|
$ |
83,576 |
|
|
$ |
65,046 |
|
Cost of goods sold |
|
|
28,168 |
|
|
|
18,112 |
|
|
|
51,581 |
|
|
|
34,618 |
|
Gross profit |
|
|
17,374 |
|
|
|
16,240 |
|
|
|
31,995 |
|
|
|
30,428 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
13,928 |
|
|
|
10,703 |
|
|
|
26,723 |
|
|
|
18,691 |
|
General and administrative |
|
|
9,818 |
|
|
|
5,978 |
|
|
|
19,947 |
|
|
|
11,654 |
|
Equity-based compensation |
|
|
8,043 |
|
|
|
36 |
|
|
|
16,944 |
|
|
|
73 |
|
Depreciation and amortization |
|
|
328 |
|
|
|
230 |
|
|
|
679 |
|
|
|
474 |
|
Total operating expenses |
|
|
32,117 |
|
|
|
16,947 |
|
|
|
64,293 |
|
|
|
30,892 |
|
Loss from operations |
|
|
(14,743 |
) |
|
|
(707 |
) |
|
|
(32,298 |
) |
|
|
(464 |
) |
Other (expense) income, net |
|
|
(44 |
) |
|
|
(42 |
) |
|
|
38 |
|
|
|
(38 |
) |
Loss before income taxes |
|
|
(14,787 |
) |
|
|
(749 |
) |
|
|
(32,260 |
) |
|
|
(502 |
) |
Provision for income taxes |
|
|
(9 |
) |
|
|
— |
|
|
|
(21 |
) |
|
|
— |
|
Net loss and comprehensive loss |
|
|
(14,796 |
) |
|
|
(749 |
) |
|
|
(32,281 |
) |
|
|
(502 |
) |
Net loss attributable to Zevia LLC prior to the Reorganization Transactions |
|
|
— |
|
|
|
749 |
|
|
|
— |
|
|
|
502 |
|
Loss attributable to noncontrolling interest |
|
|
3,706 |
|
|
|
— |
|
|
|
10,293 |
|
|
|
— |
|
Net loss attributable to Zevia PBC |
|
$ |
(11,090 |
) |
|
$ |
— |
|
|
$ |
(21,988 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.28 |
) |
|
N/A |
|
|
$ |
(0.57 |
) |
|
N/A |
|
Diluted |
|
$ |
(0.28 |
) |
|
N/A |
|
|
$ |
(0.57 |
) |
|
N/A |
|
The following table presents selected items in our condensed consolidated statements of operations and comprehensive loss as a percentage of net sales for the respective periods presented. Percentages may not sum due to rounding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net sales |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of goods sold |
|
|
62 |
% |
|
|
53 |
% |
|
|
62 |
% |
|
|
53 |
% |
Gross profit |
|
|
38 |
% |
|
|
47 |
% |
|
|
38 |
% |
|
|
47 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
31 |
% |
|
|
31 |
% |
|
|
32 |
% |
|
|
29 |
% |
General and administrative |
|
|
22 |
% |
|
|
17 |
% |
|
|
24 |
% |
|
|
18 |
% |
Equity-based compensation |
|
|
18 |
% |
|
|
0 |
% |
|
|
20 |
% |
|
|
0 |
% |
Depreciation and amortization |
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
Total operating expenses |
|
|
71 |
% |
|
|
49 |
% |
|
|
77 |
% |
|
|
47 |
% |
Loss from operations |
|
|
(32 |
)% |
|
|
(2 |
)% |
|
|
(39 |
)% |
|
|
(1 |
)% |
Other (expense) income, net |
|
|
(0 |
)% |
|
|
(0 |
)% |
|
|
0 |
% |
|
|
(0 |
)% |
Loss before income taxes |
|
|
(32 |
)% |
|
|
(2 |
)% |
|
|
(39 |
)% |
|
|
(1 |
)% |
Provision for income taxes |
|
|
(0 |
)% |
|
|
— |
|
|
|
(0 |
)% |
|
|
— |
|
Net loss and comprehensive loss |
|
|
(32 |
)% |
|
|
(2 |
)% |
|
|
(39 |
)% |
|
|
(1 |
)% |
Net loss attributable to Zevia LLC prior to the Reorganization Transactions |
|
|
0 |
% |
|
|
2 |
% |
|
|
0 |
% |
|
|
1 |
% |
Loss attributable to noncontrolling interest |
|
|
8 |
% |
|
|
— |
|
|
|
12 |
% |
|
|
— |
|
Net loss attributable to Zevia PBC |
|
|
(24 |
)% |
|
|
— |
|
|
|
(26 |
)% |
|
|
— |
|
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Change |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
Percentage |
|
Net sales |
|
$ |
45,542 |
|
|
$ |
34,352 |
|
|
$ |
11,190 |
|
|
|
33 |
% |
Net sales were $45.5 million for the three months ended June 30, 2022 as compared to $34.4 million for the three months ended June 30, 2021. Net sales growth was driven by a 30% increase in the number of equivalized cases sold, primarily from distribution expansion of $7.1 million, organic growth, pricing increases and optimizing promotional investments. We define an equivalized case as a 288 fluid ounce case.
20
Cost of Goods Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Change |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
Percentage |
|
Cost of goods sold |
|
$ |
28,168 |
|
|
$ |
18,112 |
|
|
$ |
10,056 |
|
|
|
56 |
% |
Cost of goods sold was $28.2 million for the three months ended June 30, 2022 as compared to $18.1 million for the three months ended June 30, 2021. The increase of $10.1 million or 56%, was primarily due to a 30% increase in the shipment of equivalized cases resulting in $5.3 million higher costs of goods sold, and $5.1 million higher cost of goods sold due to broad-based inflation, slightly offset by product mix.
Gross Profit and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Change |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
Percentage |
|
Gross profit |
|
$ |
17,374 |
|
|
$ |
16,240 |
|
|
$ |
1,134 |
|
|
|
7 |
% |
Gross margin |
|
|
38 |
% |
|
|
47 |
% |
|
|
|
|
|
|
Gross profit was $17.4 million for the three months ended June 30, 2022 as compared to $16.2 million for the three months ended June 30, 2021. The increase in gross profit of $1.1 million, or 7%, was primarily driven by higher net sales, offset by higher cost of goods sold.
Gross margin for the three months ended June 30, 2022 declined to 38% from 47% in the prior-year period. The decline was primarily due to higher cost of goods sold as a result of broad-based inflation.
Selling and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Change |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
Percentage |
|
Selling and marketing expenses |
|
$ |
13,928 |
|
|
$ |
10,703 |
|
|
$ |
3,225 |
|
|
|
30 |
% |
Selling and marketing expenses were $13.9 million for the three months ended June 30, 2022 as compared to $10.7 million for the three months ended June 30, 2021. The increase of $3.2 million, or 30%, was primarily due to higher freight and warehousing costs of $4.0 million largely due to increases in equivalized cases produced and sold, broad-based inflation and higher freight costs amidst a challenging transportation market in the U.S. and Canada. This increase was offset by a $0.8 million decrease in marketing spend largely due to shifting of timing and increased efficiency of marketing programs.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Change |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
Percentage |
|
General and administrative expenses |
|
$ |
9,818 |
|
|
$ |
5,978 |
|
|
$ |
3,840 |
|
|
|
64 |
% |
General and administrative expenses were $9.8 million for the three months ended June 30, 2022 as compared to $6.0 million for the three months ended June 30, 2021. The increase of $3.8 million, or 64%, was primarily driven by a $2.7 million increase in headcount and personnel costs to support our growth, and a $1.4 million increase in costs related to being a public company, including insurance, accounting, and legal and other professional fees.
Equity-Based Compensation Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Change |
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
Percentage |
Equity-based compensation |
|
$ |
8,043 |
|
|
$ |
36 |
|
|
$ |
8,007 |
|
|
N/M |
Equity-based compensation expense was $8.0 million for the three months ended June 30, 2022, of which $3.8 million related to restricted stock unit awards that were accelerated upon retirement of certain senior management employees, and the remaining $4.2 million related to outstanding equity-based awards being recognized over the remaining service periods of the awards.
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Change |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
Percentage |
|
Net sales |
|
$ |
83,576 |
|
|
$ |
65,046 |
|
|
$ |
18,530 |
|
|
|
28 |
% |
Net sales were $83.6 million for the six months ended June 30, 2022 as compared to $65.0 million for the six months ended June 30, 2021. Net sales growth was driven by a 26% increase in the number of equivalized cases sold, primarily from distribution expansion of $11.9 million, organic growth, and optimizing promotional investments. We define an equivalized case as a 288 fluid ounce case.
21
Cost of Goods Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Change |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
Percentage |
|
Cost of goods sold |
|
$ |
51,581 |
|
|
$ |
34,618 |
|
|
$ |
16,963 |
|
|
|
49 |
% |
Cost of goods sold was $51.6 million for the six months ended June 30, 2022 as compared to $34.6 million for the six months ended June 30, 2021. The increase of $17.0 million, or 49%, was primarily due to a 26% increase in the shipment of equivalized cases resulting in $8.9 million higher cost of goods sold, and $9.2 million higher cost of goods sold primarily due to broad-based inflation, slightly offset by product mix.
Gross Profit and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Change |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
Percentage |
|
Gross profit |
|
$ |
31,995 |
|
|
$ |
30,428 |
|
|
$ |
1,567 |
|
|
|
5 |
% |
Gross margin |
|
|
38 |
% |
|
|
47 |
% |
|
|
|
|
|
|
Gross profit was $32.0 million for the six months ended June 30, 2022 as compared to $30.4 million for the six months ended June 30, 2021. The increase in gross profit of $1.6 million, or 5%, was primarily driven by higher net sales, offset by higher cost of goods sold.
Gross margin for the six months ended June 30, 2022 declined to 38% from 47% in the prior-year period. The decline was primarily due to higher cost of goods sold as a result of broad-based inflation.
Selling and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Change |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
Percentage |
|
Selling and marketing expenses |
|
$ |
26,723 |
|
|
$ |
18,691 |
|
|
$ |
8,032 |
|
|
|
43 |
% |
Selling and marketing expenses were $26.7 million for the six months ended June 30, 2022 as compared to $18.7 million for the six months ended June 30, 2021. The increase of $8.0 million or 43%, was primarily due to higher freight and warehousing costs of $7.8 million largely due to increases in equivalized cases produced and sold, broad-based inflation and higher freight costs amidst a challenging transportation market in the U.S. and Canada.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Change |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
Percentage |
|
General and administrative expenses |
|
$ |
19,947 |
|
|
$ |
11,654 |
|
|
$ |
8,293 |
|
|
|
71 |
% |
General and administrative expenses were $19.9 million for the six months ended June 30, 2022 as compared to $11.7 million for the six months ended June 30, 2021. The increase of $8.3 million, or 71%, was primarily driven by a $5.3 million increase in headcount and personnel costs to support our growth, and a $3.1 million increase in costs related to being a public company, including insurance, accounting, and legal and other professional fees.
Equity-Based Compensation Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Change |
(in thousands) |
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
Percentage |
Equity-based compensation |
|
$ |
16,944 |
|
|
$ |
73 |
|
|
$ |
16,871 |
|
|
N/M |
Equity-based compensation expense was $16.9 million for the six months ended June 30, 2022, of which $3.1 million related to RSU awards and phantom stock awards that vested as of the expiration of the IPO lock-up period in January 2022, $4.0 million related to RSU awards that were accelerated upon retirement of certain senior management employees, and the remaining $9.8 million related to outstanding equity-based awards being recognized over the remaining service periods of the awards.
Seasonality
Generally, we experience greater demand for our products during the second and third fiscal quarters of the year, which correspond to the warmer months of the year in our major markets. As our business continues to grow, we expect to see continued seasonality effects, with net sales tending to be greater in the second and third quarters of the year.
Liquidity and Capital Resources
Liquidity and Capital Resources
As of June 30, 2022, we had $49.6 million in cash and cash equivalents. We believe that our cash and cash equivalents as of June 30, 2022, together with our operating activities and available borrowings under the Secured Revolving Line of Credit, will provide adequate liquidity for ongoing operations, planned capital expenditures and other investments beyond the next 12 months.
22
Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from sales of our product, and borrowing capacity currently available under our Secured Revolving Line of Credit. Our primary cash needs are for operating expenses, working capital and capital expenditures to support the growth in our business.
Future capital requirements will depend on many factors, including our rate of revenue growth, gross margin and the level of expenditures in all areas of the Company. We expect operating and capital expenditures to increase in the future as we expand business activities and increase headcount to promote growth. To the extent that existing capital resources and sales growth are not sufficient to fund future activities, we may seek alternative financing through additional equity or debt transactions. Additional funds may not be available on terms favorable to us or at all. Also, we will continue to assess our liquidity needs as the effects of the COVID-19 pandemic, global health emergencies, inflationary pressures, and the hostilities in Eastern Europe continue to disrupt and impact the global and national economies and global financial markets. If the disruption continues into the future, we may not be able to access the financial markets and could experience an inability to access additional capital, which could negatively affect our operations in the future. Failure to raise additional capital, if and when needed, could have a material adverse effect on our financial position, results of operations, and cash flows.
Prior to our IPO, we had financed our operations through private sales of equity securities and through sales of our products. In connection with our IPO, which was completed on July 26, 2021, we sold an aggregate of 10,700,000 shares of our Class A common stock at an IPO price of $14.00 per share and retained approximately $90.1 million in net proceeds, after deducting underwriting discounts and commissions and giving effect to the use of proceeds thereto. In addition, we incurred $8.4 million of offering costs in connection with the IPO. Upon consummation of the IPO, the Company became a holding company with no operations of its own. Accordingly, the Company will be dependent on distributions from Zevia LLC to pay its taxes, its obligations under the TRA and other expenses. Any future credit facilities may impose limitations on the ability of Zevia LLC to pay dividends to the Company.
In connection with the IPO and the Reorganization Transactions, the Direct Zevia Stockholders and certain continuing members of Zevia LLC received the right to receive future payments pursuant to the TRA. The amount payable under the TRA will be based on an annual calculation of the reduction in our U.S. federal, state and local taxes resulting from the utilization of certain pre-IPO tax attributes and tax benefits resulting from sales and exchanges by continuing members of Zevia LLC. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” included in the prospectus dated July 21, 2021 and filed with the SEC on July 23, 2021. We expect that the payments that we may be required to make under the TRA may be substantial. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the TRA, we expect that the reduction in tax payments for us associated with the federal, state and local tax benefits described above would aggregate to approximately $61.8 million through 2037. Under such scenario we would be required to pay the Direct Zevia Stockholders and certain continuing members of Zevia LLC 85% of such amount, or $52.5 million through 2037.
The actual amounts may materially differ from these hypothetical amounts, as potential future reductions in tax payments for us and TRA payments by us will be calculated using prevailing tax rates applicable to us over the life of the TRA and will be dependent on us generating sufficient future taxable income to realize the benefit.
We cannot reasonably estimate future annual payments under the TRA given the difficulty in determining those estimates as they are dependent on a number of factors, including the extent of exchanges by continuing Zevia LLC unitholders, the associated fair value of the underlying Zevia LLC units at the time of those exchanges, the tax rates applicable, our future income, and the associated tax benefits that might be realized that would trigger a TRA payment requirement.
However, a significant portion of any potential future payments under the TRA is anticipated to be payable over 15 years, consistent with the period over which the associated tax deductions would be realized by us, assuming Zevia LLC generates sufficient income to utilize the deductions. If sufficient income is not generated by Zevia LLC, the associated taxable income of Zevia will be impacted and the associated tax benefits to be realized will be limited, thereby similarly reducing the associated TRA payments to be made. Given the length of time over which payments would be payable, the impact to liquidity in any single year is greatly reduced.
Although the timing and extent of future payments could vary significantly under the TRA for the factors discussed above, we anticipate funding payments from the TRA from cash flows generated from operations.
Credit Facility
ABL Credit Facility
On February 22, 2022, we obtained a revolving credit facility (the “Secured Revolving Line of Credit") by entering into a Loan and Security Agreement with Bank of America, N.A. Under the Secured Revolving Line of Credit, we may draw funds up to an amount not to exceed the lesser of (i) a $20 million revolving commitment and (ii) a borrowing base which is comprised of inventory and receivables. Up to $2 million of the Secured Revolving Line of Credit may be used for letter of credit issuances with the option to increase the commitment under the Secured Revolving Line of Credit by up to $10 million, subject to certain conditions. The Secured Line of Credit matures on February 22, 2027. There have been no amounts drawn from the Secured Revolving Line of Credit.
Loans under the Secured Revolving Line of Credit bear interest based on either, at our option, the Bloomberg Short-Term Bank Yield Index rate plus an applicable margin between 1.50% to 2.00% or the Base Rate (customarily defined) plus an applicable margin between 0.50% to 1.00% with margin, in each case, determined by the average daily availability under the Secured Revolving Line of Credit.
We are required under the Secured Revolving Line of Credit to comply with certain covenants, including, among others, by maintaining Liquidity (as defined therein) of $7 million at all times until December 31, 2023. Thereafter, we must satisfy a financial covenant requiring a minimum fixed charge coverage ratio of 1.00 to 1.00 as of the last day of any fiscal quarter following the occurrence of certain events of default that are continuing or any day on which availability under the Secured Revolving Line of Credit is less than the greater of $3 million and 17.5% of the borrowing base, and must again satisfy such financial covenant as of the last day of each fiscal quarter thereafter until such time as there are no events of default and availability has been above such threshold for 30 consecutive days.
23
Cash Flows
The following table presents the major components of net cash flows from and used in operating, investing and financing activities for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
Cash (used in) provided by: |
|
|
|
|
|
|
Operating activities |
|
$ |
(19,554 |
) |
|
$ |
(37 |
) |
Investing activities |
|
$ |
28,443 |
|
|
$ |
(2,031 |
) |
Financing activities |
|
$ |
(2,351 |
) |
|
$ |
(6,488 |
) |
Net Cash Used in Operating Activities
Our cash flows used in operating activities are primarily influenced by working capital requirements.
Net cash used in operating activities of $19.6 million for the six months ended June 30, 2022 was primarily driven by a net loss of $32.3 million and by a net decrease in cash related to changes in operating assets and liabilities of $5.2 million, partially offset by non-cash expenses of $18.0 million primarily related to equity-based compensation. Changes in cash flows related to operating assets and liabilities were primarily due to an increase in accounts receivable of $8.1 million due to increases in net sales, an increase in inventories of $2.4 million in anticipation of future sales, offset by a $1.4 million decrease in prepaid expenses and other assets, primarily due to amortization of prepaid insurance policies, and a $4.2 million increase in accounts payable, accrued expenses and other current liabilities due to our overall growth.
Net cash used in operating activities of $0.0 million for the six months ended June 30, 2021 was primarily driven by net loss of $0.5 million and by a net decrease in cash related to changes in operating assets and liabilities of $0.4 million, partially offset by non-cash expenses of $0.8 million primarily related to depreciation and amortization. Changes in cash flows related to operating assets and liabilities primarily consisted of a $2.5 million increase in accounts receivable due to increase in net sales, and a $1.7 million increase in inventory due to the timing of inventory purchases, offset by a $3.8 million increase in accounts payable, accrued expenses and other current liabilities due to our overall growth.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities of $28.4 million for the six months ended June 30, 2022 was primarily due to proceeds from maturities of short-term investments of $30.0 million, offset by purchases of property and equipment of $1.6 million for marketing fixtures, software applications and computer equipment used in ongoing operations.
Net cash used in investing activities of $2.0 million for the six months ended June 30, 2021 was due to purchases of software applications and computer equipment used in ongoing operations.
Net Cash Used in Financing Activities
Net cash used in financing activities of $2.4 million for the six months ended June 30, 2022 was primarily due to minimum tax withholdings paid on behalf of employees for net share settlements of $2.1 million and payment of debt issuance costs of $0.3 million in connection with the Secured Revolving Line of Credit.
Net cash used in financing activities of $6.5 million for the six months ended June 30, 2021 was primarily driven by a distribution to unitholders for tax payments of $2.7 million and payment of deferred IPO-related costs of $3.8 million.
Non-GAAP Financial Measures
We report our financial results in accordance with US GAAP. However, management believes that Adjusted EBITDA, a non-GAAP financial measure, provides investors with additional useful information in evaluating our performance.
We calculate Adjusted EBITDA as net loss adjusted to exclude: (1) other income (expense), net, which includes interest (income) expense, foreign currency (gains) losses, and (gains) losses on disposal of fixed assets (2) provision (benefit) for income taxes (3) depreciation and amortization and (4) equity-based compensation. Adjusted EBITDA may in the future also be adjusted for amounts impacting net income related to the TRA liability and other infrequent and unusual transactions.
Adjusted EBITDA is a financial measure that is not required by, or presented in accordance with US GAAP. We believe that Adjusted EBITDA, when taken together with our financial results presented in accordance with US GAAP, provides meaningful supplemental information regarding our operating performance and facilitates internal comparisons of our historical operating performance on a more consistent basis by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of Adjusted EBITDA is helpful to our investors as it is a measure used by management in assessing the health of our business, determining incentive compensation and evaluating our operating performance, as well as for internal planning and forecasting purposes.
Adjusted EBITDA is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with US GAAP. Some of the limitations of Adjusted EBITDA include that (1) it does not properly reflect capital commitments to be paid in the future, (2) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and Adjusted EBITDA does not reflect these capital expenditures, (3) it does not consider the impact of equity-based compensation expense, including the potential dilutive impact thereof, and (4) it does not reflect other non-operating expenses, including interest (income) expense, foreign currency (gains)/losses and (gains)/losses on disposal of fixed assets. In addition, our use of Adjusted EBITDA may not be comparable to similarly-titled measures of other companies because they may not calculate Adjusted EBITDA in the same manner, limiting its usefulness as a comparative measure. Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA alongside other financial measures, including our net income (loss) or income and other results stated in accordance with US GAAP.
24
The following table presents a reconciliation of net loss, the most directly comparable financial measure stated in accordance with US GAAP, to Adjusted EBITDA for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net loss and comprehensive loss |
|
$ |
(14,796 |
) |
|
$ |
(749 |
) |
|
$ |
(32,281 |
) |
|
$ |
(502 |
) |
Other expense (income), net* |
|
|
44 |
|
|
|
42 |
|
|
|
(38 |
) |
|
|
38 |
|
Provision for income taxes |
|
|
9 |
|
|
|
— |
|
|
|
21 |
|
|
|
— |
|
Depreciation and amortization |
|
|
328 |
|
|
|
230 |
|
|
|
679 |
|
|
|
474 |
|
Equity-based compensation |
|
|
8,043 |
|
|
|
36 |
|
|
|
16,944 |
|
|
|
73 |
|
Adjusted EBITDA |
|
$ |
(6,372 |
) |
|
$ |
(441 |
) |
|
$ |
(14,675 |
) |
|
$ |
83 |
|
* Includes interest (income) expense, foreign currency (gains) losses, and (gains) losses on disposal of fixed assets.
Commitments
Our leases generally consist of long-term operating leases, which are payable monthly and relate to our office space and vehicles. For a further discussion on our debt and operating lease commitments as of June 30, 2022, see the sections above as well as Note 7, Debt, and Note 8, Leases, included in the condensed consolidated financial statements of this Quarterly Report.
On March 25, 2022, the Company entered into an amendment to the lease for our corporate headquarters offices to extend the term through December 31, 2023 and expand the total square footage from 17,923 square feet to 20,185 square feet commencing on May 1, 2022.
Our inventory purchase commitments are generally short-term in nature and have ordinary commercial terms. We did not have any material long-term inventory purchase commitments as of June 30, 2022.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report are prepared in accordance with US GAAP. The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
There have been no material changes to our critical accounting policies from those discussed in our Annual Report.
Recent Accounting Pronouncements
Refer to Note 2, Summary of Significant Accounting Policies, included in the Condensed Consolidated Financial Statements of this Quarterly Report for a discussion of recently issued accounting pronouncements not yet adopted.
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” We may take advantage of these exemptions until we are no longer an “emerging growth company.” Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of the IPO or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if any of the following events occur; (i) we have more than $1.07 billion in annual revenue, (ii) we have more than $700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or (iii) we issue more than $1.0 billion of non-convertible debt securities over a three- year period.
Exhibit 10.3